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Australia a 'stand out' competitor in oversupplied coal market

9th February 2015

  

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PERTH (miningweekly.com) – Australian and Indonesian coal suppliers were likely to have a better 2015 than their global counterparts, analyst Wood Mackenzie (Woodmac) reported on Monday, as the regions continued to capture market share of coal exports from higher cost producers.

Further modest productivity gains, the rapid fall in oil prices and currency devaluation in Australia and Russia were expected to help lower costs, meaning that Australian mines were in a relatively strong position compared with higher cost suppliers, particularly those in the US, which were at much greater risk of closures this year.

Even with increased closures and reduced US supply, Woodmac did not see sufficient volume exiting the supply chain to balance the market and support price recovery.

Lower-than-anticipated demand, especially from China combined with persistent production would be key factors sustaining the weak market environment.

“Australia is a standout competitor in both the metallurgical and thermal coal trade, but particularly the former. Comparing 2014 from 2013, while global metallurgical coal import demand reduced by about eight-million tonnes, Australian exports rose by around 14-million tonnes, growing  seaborne market share from 58% to 64%,” said Woodmac principal Asia Pacific coal analyst Rory Simington.

“The scalability of Australian mines and their high-quality coal has enabled the displacement of major competitors in US, Canada and Indonesia. This trend is likely to continue thanks to a continued strong operating performance plus currency depreciation. On the other hand, US suppliers, many of which exhibit high costs, will not see the cost relief that currency devaluation brings to Australia.”

Further, Simington noted that increased competition would come from higher Mozambique exports this year as Brazilian major Vale’s Nacala transport corridor ramped up, indicating another year of aggressive pricing.

In thermal coal, Australian exports were also strong, leaping 20-million tonnes despite seaborne demand remaining essentially flat last year.

Despite a traumatic 2014 for the coal industry, mine shutdowns were relatively muted. Simington noted that metallurgical supply reductions, in fact, were more than offset by the reduction in Chinese import demand, resulting in increased overcapacity.

“Although overall closures will accelerate this year, they will unlikely redress the imbalance,” he added.

Costly take-or-pay obligations in the event of closure made it more expensive for mines to shut down than to operate at a loss. As such, they remained in production and hampered the return to tighter market conditions.

The recent low oil price and exchange rate had driven cost relief for Australia, Indonesia and Russia, which Simington said would further reduce the likelihood of wholesale supply cuts and would delay a price recovery.

Meanwhile, China’s economic rebalancing would continue to affect power demand growth and, therefore, thermal coal requirements.

Of critical importance to the seaborne trade would be the effects of government policies designed to protect the environment and domestic coal suppliers.

“Current industry focus is on the new trace element restrictions for imported coal. We see most seaborne supply meeting the new guidelines but import levels are affected due to the uncertainty of the accuracy of coal quality tests and delays it may cause to the delivery process,” said Woodmac research director of global metallurgical coal, Robin Griffin.

“Another big uncertainty to watch is the lengths to which the Chinese government will go to protect its domestic industry.”

Woodmac flagged that stricter limits on imported coal quality were possible and the government could make an aggressive move to waive the 17% value added tax charged on coal sales, which could considerably enhance the competitiveness of Chinese coal and enable some of the best-quality and lowest cost Chinese coking coal to compete into Japan, South Korea or Taiwan. Should this occur, the oversupply situation could worsen in 2015.

“As China makes up 22% of seaborne trade and is expected to see continued domestic oversupply, the country will be a major cause of depressed global import demand this year,” Griffin said.

“Market fundamentals outside of China also remain uninspiring, for both metallurgical and thermal coal. Under such circumstances a material price recovery is unlikely this year."

Edited by Creamer Media Reporter

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